Corn’s Trend Remains Bullish

Nearby December CBOT corn futures closed at the $6.7750 level at the end of September. On October 13, they were flirting with $7 per bushel. Corn is food and fuel, as it is the primary ingredient in US ethanol. While the weather and conditions across the world’s growing regions remain a crucial factor for the path of least resistance of prices, increasing energy prices put upward pressure on corn. 

Corn prices remained at the highest level in years on October 13, and the prospects are for a continuation of bullish price action.

Corn’s bullish trend

CBOT corn futures reached a record high of $8.4375 per bushel in 2012 as drought weighed on supplies. After falling to the $3 per bushel level in 2016 and 2020, the price took off on the upside, reaching $8.27 in April 2022, only 16.75 shy of the 2012 peak. 

As the chart highlights, at the $6.93 per bushel level on October 13, corn corrected from the 2022 high but remained at the highest price since 2013. 

The October 12 WASDE report and corn

The USDA’s monthly World Agricultural Supply and Demand Estimates Report is the gold standard for fundamentals in the corn and other agricultural commodity markets. The WASDE told the corn market:

This month’s 2022/23 U.S. corn outlook is for reduced supplies, greater feed and residual use, lower exports and corn used for ethanol, and smaller ending stocks. Corn production is forecast at 13.895 billion bushels, down 49 million on a reduction in yield to 171.9 bushels per acre. Corn supplies are forecast at 15.322 billion bushels, a decline of 172 million bushels from last month, as lower production and beginning stocks are partially offset by higher imports. Exports are lowered 125 million bushels reflecting smaller supplies and slow early-season demand. Projected feed and residual use is raised 50 million bushels based on indicated disappearance during 2021/22. Corn used for ethanol is lowered 50 million bushels. With supply falling more than use, corn ending stocks for 2022/23 are cut 47 million bushels. The season-average corn price received by producers is raised 5 cents to $6.80 per bushel. Global coarse grain production for 2022/23 is forecast down 3.8 million tons to 1,459.8 million. The 2022/23 foreign coarse grain outlook is for lower production, greater trade, and smaller stocks relative to last month. Foreign corn production is reduced as declines for the EU and Serbia are partly offset by an increase for India. EU corn production is lowered reflecting reductions for Romania, Bulgaria, Hungary, and France. India corn production is raised based on the latest government statistics. Corn exports are raised for Ukraine and India but lowered for the United States and Serbia. For 2021/22, corn exports for Argentina are lowered for the local marketing year beginning March 2022 based on shipments through the month of September. For 2022/23, corn imports are lowered for Iran, Japan, and Vietnam, but raised for the EU and United States. Foreign corn ending stocks are down, mostly reflecting reductions for China and Ukraine. Global corn stocks, at 301.2 million tons, are down 3.3 million.

Source: USDA

The bottom line is that US corn supplies are declining on increased feed and residential use, lower exports, and corn used to produce biofuel. US inventories fell month-on-month, and the global corn balance sheet reflects an inventory decline because of lower stockpiles and production in China and Ukraine. Global corn stocks fell by 3.3 million tons from September through October. 

I reached out to Sal Gilberte, the founder of the Teucrium family of agricultural ETF products, including the CORN, WEAT, and SOYB ETFs. Sal told me:

October’s WASDE report really hammered home the tightness in U.S. grain markets and reemphasized the fact that although the world will produce a record amount of wheat again this year, it will still use more than it produces. Inside the U.S. more wheat will be used than grown for the sixth consecutive year, and more soybeans will be used than grown for the third consecutive year. This year the U.S. will also use more corn than it produces. All the big grain balance sheets are tightening inside the U.S. and the U.S. is the world’s number one corn exporter, the number two soybean exporter, and the number five wheat exporter – and that’s if EU wheat exports are viewed as a single block. As a result of tight fundamentals, prices of all three grains are trading at elevated levels well above their cost of production. History has shown that over time elevated grain prices tend to trade back toward their cost of production, but that is as a result of farmers around the world responding to the higher prices and increasing levels of total production to levels above those of total demand. Until that scenario becomes a reality, it would seem that grain prices and the volatility of grain prices will remain elevated relative to historical norms.

When it comes to corn, the takeaway is, “This year, the US will use more corn than it produces,” a bullish scenario in the current environment.  

The war in Ukraine and the corn futures market

When the US requires more corn than it produces, it turns to the worldwide export market. In 2020, the US was the world’s leading corn exporter. 

Source: beef2live.com

As the chart shows, Ukraine was the fourth-leading corn exporter, with 12.28% of the world’s corn exports coming from the country. Russia and Ukraine are Europe’s breadbasket, and in 2022, the fertile soil is a battlefield. Moreover, the Black Sea Ports, a crucial logistical export hub, is a war zone. The US can turn to Brazil and Argentina, but it must compete with China, Mexico, Japan, and Egypt, the world’s leading corn-importing countries. 

The war in Ukraine has caused global supplies to shrink and prices to rise, and a continuation of the conflict will only reduce inventories and production in 2023. Meanwhile, since corn is the primary ingredient in US ethanol production, the highest gasoline prices in years put additional upside pressure on the coarse grain. Moreover, as the global population grows by around 20 million each quarter, more mouths to feed increases the demand side of corn’s fundamental equation. Supplies must keep pace with the rising demand, or prices will continue to rise, and shortages will develop. 

Bull markets rarely move in straight lines

Corn fundamentals remain highly bullish in the current geopolitical environment, but bull markets can suffer sudden and brutal corrections.

The chart shows the severe decline from the April $8.27 per bushel peak to the July $5.615 low, a 32% plunge, the bulk of which occurred during the week of July 11. At the $6.93 level, corn futures were at the midpoint of the 2022 price range. 

Meanwhile, inflation has increased the cost of producing a corn bushel. Higher energy, labor, equipment, financing, and other expenses support the current prices and higher levels. Moreover, Russia is the leading fertilizer exporter, and it has punished “unfriendly” countries supporting Ukraine by limiting or stopping fertilizer exports. Fertilizer prices have soared, and availabilities are scarce in 2022. The bottom line is the prospects for higher corn prices remain high in the current geopolitical environment. 

CORN is the ETF product that tracks the corn futures arena

I favor buying corn on price weakness over the coming weeks and months. The most direct route for a trading or investment position in the corn market is via the futures and futures options on the CME’s CBOT division, which is the world’s most liquid corn futures market. For those looking to participate in the corn market without venturing into the futures arena, the Teucrium Corn ETF (CORN) provides an alternative. At $27.67 per share, CORN had over $216.1 million in assets under management. The ETF trades an average of 272,198 shares daily and charges a 1.14% management fee. CORN is a highly transparent ETF, and its fund summary states:

The CORN ETF tends to hold three actively traded CBOT corn futures contracts, limiting the risk during roll periods when the active month contract rolls to the next period. Meanwhile, the most volatility tends to occur in the active contract, so the ETF often underperforms the nearby corn futures during rallies and outperforms the futures contract when the price corrects. 

Corn is one of the commodities in the crosshairs of the war in Ukraine. While the weather tends to drive prices higher or lower in typical years, 2022 is anything but an ordinary period. Geopolitics is the most influential factor for the path of least resistance of the coarse grain until peace breaks out in Ukraine and tensions between Russia and the US and NATO countries ease. 

More Grain News from Barchart

On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes.

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